When buying stocks, and those specifically with dividend payments, it is common practice to reinvest - i.e., buying even more shares with the money you get from the dividends. That is why some people may refer to the dividend calculator as dividend reinvestment calculator. Some companies also offer DRIP opportunities (Dividend ReInvestment Plans). In such cases, instead of getting dividends from the company, it automatically gets reinvested into more shares, hence the other name of our tool - the DRIP calculator.
The other, more important, implication when reinvesting is that dividends are compounding meaning they are added back to the initial invested amount. In simple terms, it means that if you use your dividends to buy even more shares, you will receive a greater amount the next time your dividend pays out because you have more shares, and so on. This allows us to calculate dividends by using the mathematics already set out when calculating compound interest.
In this case, the formula for dividend reinvestment is as follows:
FV = P * (1 + r / m)^mt,
where:
FV - the future value of the investment, in our calculator it is the final balance
P - the money invested or initial balance (the value of the investment)
r - the dividend yield (in decimals)
m - the number of times the dividend is compounded per year (compounding frequency)
t - the numbers of years the money is invested for
If those calculations seem a bit overwhelming, fear not, this is what our calculator is here for! In the next section we will show you how to calculate dividend payouts step by step. You might also be interested in our APY calculator which calculates annual interest yield.
